Thursday, June 27, 2013

Shareholder value - the force that drives the self preservation instinct as well as the animal spirits in virtually every corporate leader - is the scheme by which corporate chieftains and activist "investors" can extract lots of money via the stock market under the guise of improving corporate performance (mainly profitability)*. The structure of the scheme is fairly straightforward: an activist "investor" targets an underperforming (usually) publicly-traded company and threatens to upset the sleepy apple cart primarily via cost cutting, which usually involves lots of firings, benefits reductions, facility closures, outsourcing, and, (uh oh) often includes firing existing senior management**.

Now, one doesn't need the activist investor to actually take action to bring about the desired result. Merely the possibility of such action is often enough to get existing corporate management to toe the shareholder value line. Then there's the pressure on (and from) traditional institutional investors who, while not necessarily soiling their hands by directly engaging in corporate activism (wink wink), are well aware of shareholder value's attributes and advocate for its outcomes. After all, higher market values is the name of their game, too.

Of course, for those more enlightened CEO's and other senior managers, higher stock market values and the ability to reap the enormous benefits via virtually risk-free stock options (with price resets, if needed) is an personal finance aphrodisiac too powerful to resist. And in the process, the longer term suffers for the short term. For the reality is that in today's capital markets shortermism is the name of the game.

So, where is the governor, the moderator, the protector of society at-large and the working man and woman (who just happen to be consumers in all this)? Where's the bigger picture perspective, one that takes into consideration the larger socioeconomic effects of higher unemployment rates, worker displacements, and stagnant real incomes that shareholder value facilitates? Well, that would be none other than our trusty elected officials. But when a system is constructed whereby the levers of power can (almost) only be achieved by spending large sums of money, then those who rise to positions of executive, legislative, and regulatory power are logically beholden NOT to those who pulled the voting machine levers BUT to those who helped persuade those who pulled the voting machine levers. Hence, the money game in politics. A political Svengali act if there ever was one.

Is this a Scalia-like rant, a rage against the machine? Nope. It's merely a dispassionate assessment of how things are - not how they should be, for that would require a whole new socioeconomic compact, something that a tiny handful of individuals and institutions dream will one day become a reality. And while dreams can come true, the reality is that we live in a world where a famous dead idealist who once said "I have a dream" has morphed into a world where a self preservation politician now says "I have a drone".

Investment Strategy Implications

New England Patriots' head coach, Bill Belichik, is famous for his expression "Do your job", exhorting his players to focus on the task at hand. And doing their job is exactly what today's CEO and other senior corporate management staff do when it comes to what and how they run their businesses. Self preservation melds with self interests in the act of maximizing corporate profitability which begets an increased shareholder value which begets mucho dinaro for some.

Oh, sure there are lots of flowery Obamaesque language about being a solid corporate citizen with token gestures made to that imagery. But the reality is that (a) all such efforts are done with the thought as to what it means to the top and bottom lines of a business, as a good image is almost always good for business (unless you're a bottom feeding, Madonna Ciccone/Lady Gogo/Keith Richards/being skanky-is-my-style type) and (b) it's largely inconsequential in the total scheme of things ("the scraps from Longshanks table", says William Wallace).

This is a complicated, tangled web of factors that will not be reversed until such time when the scheme runs its course and pushes the global economy over the edge. And when that day occurs, then an extreme response will likely be the successor. Until then, don't blame the CEO. He/she is just doing their job.

*It is also a scheme by which pubic policy is impacted (tax policy, for example), a topic that would be far too extensive to be covered here.

**The justification for the scheme is straightforward, too: the financial markets are efficient and, therefore, represent the true risk and reward of a company's business. Accordingly, any improvement in the financial circumstances of a publicly-traded company will be reflected in its stock price. Ipso facto. Of course, this neglects the facto that a publicly-traded company's stock price is impacted by a myriad of factos, many of which have nothing to do with or under the direct control of corporate management. By why let a few pesky factos get in the way of a fantastical money making scheme.

***

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bio

President and Global Investment Strategist with Blue Marble Research Advisory Services and author of "Sectors and Styles" (Wiley 2006).
A leading investment strategist and asset manager, Mr. Catalano appears regularly in the media (Bloomberg TV & Radio, foxbusiness.com, BNN TV, CNBC, New Delhi TV, CCTV - America), is frequently quoted in various professional publications (Wall Street Journal, Barrons, Financial Times, Reuters), and is a guest speaker at various major forums. Vinny also produces and conducts timely topical and educational programs with many CFA Societies and other groups, including the highly acclaimed "Market Forecast Series".
Previously, Catalano was a Senior Financial Advisor with Merrill Lynch providing investment advice and counseling to high net worth individuals. During this time, he also provided educational and informational instruction to senior and mid level corporate executives of publicly-traded and privately held companies.
Vinny is a past president of the New York Society of Security Analysts, chair of its "Global Thematic Committee", and a Nonresident Senior Fellow at the Information Technology and Innovation Foundation.

Morning Call May 2007

Morning Call April 2007

CNBC "Kudlow & Co". March 2007

Morning Call March 2007

Kudlow & Co. February 2007

McDonald, Catalano, Luskin, and Burnett

Kudlow & Co. February 2007

Laffer, Catalano, and Froehlich

Kudlow & Co. January 2007

Malpass, Abrams, and Catalano

Disclaimer

The information found on this blog and in published reports. was prepared from data we believe to be reliable but is not guaranteed by us as being accurate and does not purport to be a complete statement or summary of available data. Such information and any views or opinions expressed herein are not to be considered as an offer to sell or a solicitation of an offer to buy securities of the sectors or styles covered on this blog and in published reports. Opinions expressed are subject to change without notice. Past results are no indication of future results.

Full disclosure: While neither Vincent Catalano nor any member of his family hold positions listed on this blog and in published reports, accounts managed by Blue Marble Research may hold such positions.

Some of the sectors, styles, regions, and countries mentioned are the recipients of trends and themes that might vary from those noted on this blog and in published reports.

Vincent Catalano certifies that all of the views expressed on this blog and in published reports accurately reflect his personal views regarding any and all of the subject securities or issuers.